In re Motors Liquidation Co.

529 B.R. 510

In re Motors Liquidation Company, et al., f/k/a General Motors Corp., et al., Debtors.

Case No.: 09–50026 REG Jointly Administered

United States Bankruptcy Court, S.D. New York.

Signed April 15, 2015

KING & SPALDING LLP, 1185 Avenue of the Americas, New York, New York 10036, By: Arthur J. Steinberg, Esq. (argued) Scott I. Davidson, Esq., Counsel for General Motors LLC (New GM)

KIRKLAND & ELLIS LLP, 300 North LaSalle, Chicago, Illinois 60654, By: Richard C. Godfrey, Esq., Andrew B. Bloomer, Esq., Counsel for General Motors LLC (New GM)

BROWN RUDNICK, Seven Times Square, New York, New York 10036, By: Edward S. Weisfelner, Esq. (argued), David J. Molton, Esq., May Orenstein, Esq., Howard S. Steel, Esq., Rebecca L. Fordon, Esq., Designated Counsel and Counsel for Economic Loss Plaintiffs

STUTZMAN, BROMBERG, ESSERMAN & PLIFKA, P.C., 2323 Bryan Street, Suite 2200, Dallas, Texas 75201, By: Sander L. Esserman, Esq. (argued), Designated Counsel and Counsel for Economic Loss Plaintiffs

GOODWIN PROCTER, LLP, The New York Times Building, 620 Eighth Avenue, New York, New York 10018, By: William P. Weintraub, Esq. (argued), Eamonn O'Hagan, Esq., Gregory W. Fox, Esq., Designated Counsel and Counsel for Pre-Sale Accident Victim Plaintiffs

GOLENBOCK, EISEMAN, ASSOR, BELL & PESKOE, LLP, 437 Madison Avenue, New York, New York 10022, BY: Jonathan L. Flaxer, Esq. (argued), S. Preston Ricardo, Esq., Counsel for Groman Plaintiffs

GIBSON, DUNN & CRUTCHER, LLP, 200 Park Avenue, New York, New York 10166, BY: Lisa H. Rubin, Esq. (argued), Keith R. Martorana, Esq., Matthew Williams, Esq., Adam H. Offenhartz, Esq., Aric H. Wu, Esq., Counsel for Wilmington Trust Company as GUC Trust Administrator

AKIN, GUMP, STRAUSS, HAUER & FELD, LLP, One Bryant Park, New York, New York 10036, By: Daniel Golden, Esq., Deborah J. Newman, Esq. (argued), Jamison A. Diehl, Esq., Naomi Moss, Esq., Counsel for Participating GUC Trust Unit Trust Holders

DECISION ON MOTION TO ENFORCE SALE ORDER

ROBERT E. GERBER, UNITED STATES BANKRUPTCY JUDGE:

Introduction...520

Summary of Conclusions...523

1. Due Process...523

(a) Notice Before Entry of Sale Order...524

(b) Notice Before Expungement of Claims...525

(c) Requirement for Prejudice...525

2. Remedies...527

3. Assumed Liabilities...528

4. Equitable Mootness...528

5. Fraud on the Court...529

6. Certification to the Circuit...529

Facts...529

1. Background...529

2. Chapter 11 Filing...530

3. The Sale Motion and Notice Order...530

4. Notice of the Sale...531

5. Objections to Free and Clear Provisions...531

6. Sale Agreement—Relevant Provisions...533

7. The Sale Order...534

8. Matters After the Sale...535

9. The GUC Trust and its Operation...536

10. Knowledge of the Ignition Switch Defect...538

11. The Motion to Enforce...538

12. The Threshold Issues...539

Discussion...540

I. Due Process...540

A. Underlying Principles...540

1. Mullane...540

2. Second Circuit Guidance...543

3. Guidance from Lower Courts...546

4. The Known–Unknown Creditor Distinction...547

B. The Particular Issues Here...550

1. Do Due Process Requirements Apply?...550

2. Notice by Publication...555

3. Known Claim Analysis...556

4. The Requirement for Prejudice...560

5. Application of Those Principles to Economic Loss Plaintiffs...565

(a) Successor Liability...566

(b) New GMs Own Wrongful Acts...568

(c) The Used Car Purchasers...570

6. Application of Those Principles to Pre–Closing Accident Plaintiffs...572

7. Application to Filing of Claims...573

II. Remedies...574

A. The Sale Order...574

1. Prejudice As Affecting Remedy...575

2. Attaching Claims to Sale Proceeds...575

3. Protection of Purchasers of Estate Assets...576

4. Effect of Constitutional Violations...577

5. Remedies Conclusion...582

B. Claims...583

III. Assumed Liabilities...583

IV. Equitable Mootness...583

A. Underlying Principles...584

B. Applying Those Principles Here...585

1. Ability to Fashion Effective Relief...586

2. Effect on Re-emergence of Debtor as Revitalized Corporate Entity...587

3. Unraveling Intricate Transactions...587

4. Adversely Affected Parties...589

5. Pursuit of Stay Remedies...590

V. Fraud on the Court...592

1. Effect on Process of Adjudication...594

2. Victim of the Fraud...595

3. Particular Standards to Apply...596

VI. Certification to Circuit...597

Conclusion...598

Introduction

In this contested matter in the chapter 11 case of Debtor Motors Liquidation Company, previously known as General Motors Corporation (“Old GM ”), General Motors LLC (“New GM ”)—the acquirer of most of Old GM's assets in a section 363 sale back in July 2009—moves for an order enforcing provisions of the July 5, 2009 order (the “Sale Order ”) by which this Court approved New GM's purchase of Old GM's assets.¹

The Sale Order, filed in proposed form on the first day of Old GM's chapter 11 case with Old GM's motion for the sale's approval, was entered, in a slightly modified form, within a few hours after this Court issued its opinion approving the sale.² There were approximately 850 objections to the 363 Sale, the proposed Sale Order, or both. But the most serious were those relating to elements of the Sale Order (“Free and Clear Provisions ”), discussed in more detail below, that provided that New GM would purchase Old GM's assets “free and clear” of successor liability claims. After lengthy analysis,³ the Court overruled those objections.

In March 2014, New GM announced to the public, for the first time, serious defects in ignition switches that had been installed in Chevy Cobalts and HHRs, Pontiac G5s and Solstices, and Saturn Ions and Skys (the “Ignition Switch Defect ”), going back to the 2005 model year. In the Spring of 2014 (though many have queried why Old GM and/or New GM failed to do so much sooner), New GM then issued a recall of the affected vehicles, under which New GM would replace the defective switches, and bear the costs for doing so.

New GM previously had agreed to assume responsibility for any accident claims involving post-sale deaths, personal injury, and property damage—which would include any that might have resulted from the Ignition Switch Defect. But New GM's announcement was almost immediately followed by the filing of about 60 class actions in courts around the United States, seeking compensatory damages, punitive damages, RICO damages and attorneys fees for other kinds of losses to consumers—“Economic Loss ”—alleged to have resulted from the Ignition Switch Defect. The claims for Economic Loss include claims for alleged reduction in the resale value of affected cars, other economic loss (such as unpaid time off from work when getting an ignition switch replaced), and inconvenience. The Court has been informed that the number of class actions now pending against New GM—the great bulk of which were brought by or on behalf of individuals claiming Economic Loss (“Economic Loss Plaintiffs ”)—now exceeds 140. Though the amount sought by Economic Loss Plaintiffs is for the most part unliquidated, it has been described as from $7 to $10 billion. Most of those actions (“Ignition Switch Actions ”) are now being jointly administered, for pretrial purposes, in a multi-district proceeding before the Hon. Jesse Furman, U.S.D.J., in the Southern District of New York (the “MDL Court ”).

New GM here seeks to enforce the Sale Order's provisions, quoted below, blocking economic loss lawsuits against New GM on claims involving vehicles and parts manufactured by Old GM.⁴ New GM argues that while it had voluntarily undertaken, under the Sale Order, to take on an array of Old GM liabilities (for the post-sale accidents involving both Old GM and New GM vehicles just described; under the express warranty on the sale of any Old GM or New GM vehicle (the “Glove Box Warranty ”); to satisfy statutory recall obligations with respect to Old GM and New GM vehicles alike; and under Lemon Laws, again with respect to Old GM and New GM vehicles alike), the Sale Order blocked any others—including those in these suits for Economic Loss.

The Sale Order, as discussed below, plainly so provides. But as to 70 million Old GM cars whose owners had not been in accidents of which they'd advised Old GM, the Sale Order was entered with notice only by publication. And those owning cars with Ignition Switch Defects (again, those who had not been in accidents known to Old GM)—an estimated 27 million in number—were given neither individual mailed notice of the 363 Sale, nor mailed notice of the opportunity to file claims for any losses they allegedly suffered. And more importantly, from the perspective of these car owners, they were not given recall notices which (in addition to facilitating switch replacement before accidents took place), they contend were essential to enabling them to respond to the published notices to object to the 363 Sale or to file claims.

Then, after New GM filed the Motion to Enforce, two other categories of Plaintiffs came into the picture. One was another group of Ignition Switch Defect plaintiffs (the “Pre–Closing Accident Plaintiffs ”) who (unlike the Economic Loss Plaintiffs) are suing with respect to actual accidents. But because those accidents involved Old GM and took place before the 363 Sale Closing—and taking on pre-closing accident liability was not commercially necessary to New GM's future success—they were not among the accidents involving Old GM vehicles for which New GM agreed to assume responsibility. The Pre–Closing Accident Plaintiffs have (or at least had) the right to assert claims against Old GM (the only entity that was in existence at the time their accidents took place), but they nevertheless wish to proceed against New GM. New GM brought a second motion to enforce the Sale Order⁵ with respect to the Pre–Closing Accident Plaintiffs, and issues with respect to this Plaintiff group were heard in tandem with the Motion to Enforce.

The other category of Plaintiffs later coming into the picture (“Non–Ignition Switch Plaintiffs ”) brought actions asserting Economic Loss claims as to GM branded cars that did not have Ignition Switch Defects,...